Acca Performance Management (PM) : Practice & Revision Notes
Acca Performance Management (PM) : Practice & Revision Notes
Acca Performance Management (PM) : Practice & Revision Notes
The contents of this book are intended as a guide and not professional advice. Although every effort has been made to
ensure that the contents of this book are correct at the time of going to press, BPP Learning Media makes no warranty
that the information in this book is accurate or complete and accept no liability for any loss or damage suffered by any
person acting or refraining from acting as a result of the material in this book.
Page
Introduction
Skills bank 7
Knowledge bank 13
Appendices 109
Introduction
How to use the Practice & Revision material
Step 1 Learn
Until now you have been introduced to the core skills needed to pass this exam. You must now focus on developing
these new skills to address the ultimate test – the exam itself.
Step 2 Practise
Your revision course material will help you to apply this knowledge to the context of the exam-style questions. Using
real exam questions written by the examining team you'll learn the unique exam skills required to achieve success in
each exam. Your revision material consists of:
Step 3 Rehearse
All your skills need to be applied on the day of the exam to deal with a complete exam.
This can be developed through use of mock exams within the Practice & Revision Kit.
The examination
The examination lasts for 3 hours and consists of three sections.
Computer-based exams
It will only be possible from exams in June 2019 for candidates to sit Applied Skills exams as a computer-based exam
(CBE). Paper-based exams will no longer be run in parallel.
Exam duration
The syllabus is assessed by a computer-based exam (CBE) format. With effect from June 2019 for TX and
September 2019 for all Applied Skills exams, seeded questions have been removed from CBE exams and the exam
duration is 3 hours for 100 marks. Prior to the start of each exam there will be time allocated for students to be informed
of the exam instructions.
Section A and B questions will be selected from the entire syllabus. These will be a variety of objective test questions.
The responses to each question or subpart in the case of OT cases are marked automatically as either correct or
incorrect by a computer.
Section C questions will mainly focus on the following syllabus areas but a minority of marks can be drawn from any
other area of the syllabus
Information, technology and systems for organisational performance (A)
Decision-making techniques (syllabus area C)
Budgeting and control (syllabus area D)
Performance management and control (syllabus area E)
The responses to these questions are human marked.
Main capabilities
The syllabus aims to test the student's ability to:
Identify and discuss the information, systems and developments in technology required for organisations to
manage and measure performance
Explain and apply cost accounting techniques
Select and appropriately apply decision-making techniques to facilitate business decisions and promote efficient
and effective use of scarce business resources, appreciating the risks and uncertainty inherent in business and
controlling those risks
Identify and apply appropriate budgeting techniques and methods for planning and control and use standard
costing systems to measure and control business performance and identify remedial action
Assess the performance of an organisation from both a financial and non-financial viewpoint, appreciating the
problems of controlling divisionalised businesses and the importance of allowing for external aspects.
PM requires you to be able to apply techniques and think about their impact on the organisation. It seeks to examine
candidates' understanding of how to manage the performance of a business.
1 Effective reading
and planning at the
5 Good knowledge of start of the exam
the whole syllabus
B C
2 Tackling multiple
4 Tackling constructed choice questions.
response questions Specific skills are
Good technique is needed in section A
essential in section C of the exam
Each of these key skills is analysed on the following pages. Example(s) from past exam questions have been
included to illustrate the importance of these skills and how these skills should be applied.
A ...... ……
B
C
...... ……
...... …… Skill 2 – Tackling multiple choice question
D ...... ……
Section A and B of the exam will include some 2 mark multiple choice questions. Time allocation is important
here to ensure you tackle the questions in the allotted time. There is no negative marking on multiple choice
questions, so if you are unsure you should make sure that you guess rather than leaving the question out!
Having a selection of answers to choose from does not make multiple choice questions easier. The wrong options
will often be very plausible. You need to think carefully before selecting an option and ensure you practice lots of
questions so that you can spot red-herrings and potential pitfalls.
Basic variance analysis is assumed knowledge in PM. You should ensure that you have a good knowledge of the basic
calculations in preparation for the exam.
Variance
analysis
Interpretation
Consider:
Cause
Controllable or uncontrollable
Correct standard
Measurement
Interdependencies of variances
Kgs
Usage:
'Should' Actual production should use X
'Did' Actual production did use (X)
X
Difference valued at standard cost $X
Labour variances
$
Rate:
'Should' Actual hours paid should cost X
'Did' Actual hours paid did cost (X)
X
Efficiency: Hrs
'Should' Actual production should take X
'Did' Actual production did take (X)
X
Difference valued at standard rate per hour $X
Efficiency: Hrs
'Should' Actual production should take X
'Did' Actual production did take (X)
X
Difference valued at standard rate per hour $X
$ Units
'Should' Budget expenditure X 'Should' Budgeted units X
'Did' Actual expenditure (X) 'Did' Actual units (X)
X X
Difference valued at OAR
per unit $X
Efficiency Capacity
Hours Hours
'Should' X 'Should' X
Actual production should take Budgeted hours worked
'Did' (X) 'Did' (X)
Actual production did take Actual hours worked
X X
Difference valued at OAR $X Difference valued at OAR $X
rate per hr rate per hour
Volume: Units
'Should' Budgeted sales units X
'Did' Actual sales units (X)
X
Difference valued at standard contribution/unit $X
Under absorption costing this variance will be valued at standard profit/unit.
$
Budgeted contribution
Sales volume contribution variance
Sales price variance
Labour Rate
Idle
Efficiency
Actual contribution
Fixed overheads
Budgeted
Expenditure variance
Actual
Actual profit
$
Budgeted profit
Sales volume profit variance
Sales price variance
Actual profit
Primary Secondary
Collected by Obtained from
organisation existing information
Expensive Cheaper
Bespoke
Characteristics:
Strategic Long term TPS Transaction Volume
processing system Velocity
MIS Management Variety
Tactical Medium term information systems
EIS Executive information
systems
Operational Day to day ERP Enterprise resource
planning systems
Externally focused Target cost – estimated Turns traditional pricing on Implementation of target
approach. cost = cost gap its head costing is more difficult in
Cost control is considered service businesses:
A selling price is set with Any cost gap needs to be upfront as part of the
reference to the market. closed through product product development Cost measurement is
The desired profit margin design and processing Performance management more difficult.
is then deducted leaving improvements. focuses on: Price set is based upon
a target cost. – Sales targets and qualitative information
selling price Characteristics of
– Improving processes service industry:
/development to drive - Simultaneity
down cost - Heterogeneity
Target costing is suitable - Intangibility
in today's environment as - Perishability
short product life cycles
mean it is essential to
consider costs upfront.
Derive a life cycle cost in manufacturing and service Q1 Section A – September 2016
industries. Q7 Section A – December 2016
Identify the benefits of life cycle costing. Q26 Section B – September 2016
Stages of the product life Costs at the different stages Benefits of life cycle costing
cycle of the life cycle
Throughput
accounting
Return/hour Products
Cost/hour Divisions
TPAR Limiting factor scenarios
2 Formula summary
Learn
Sales material purchases
Return / hour =
Time on key resource
Return / hour
TPAR =
Cost / hour
Managing environmental
costs
Contribution / unit
Contribution/Sales ratio =
Selling price / unit
Fixed costs
Breakeven revenue =
C/S ratio
Budgetedsales – Breakevensales
Margin of safety (%) =
Budgetedsales
Fixed costs target profit
Output required for target profit =
Unit contribution
Contribution = Sales – all variable costs
Fixed costs
Breakeven revenue =
Weighted average C/S ratio
Linear programming
Graphical
Simultaneous equations
Demand
Other strategies
Premium pricing Imply product is different in some way, typically quality, enabling high
price to be charged
Price discrimination Same product is sold in different markets at different prices.
Discrimination may be by:
Age
Location
Time
Product bundling A group of products sold together at a lower price than if bought
individually
Psychological pricing Setting prices at $9.99 instead of $10
Product line pricing Assess profitability of product range rather than individual products within
it
Complementary products One good sold relatively cheaply, stimulates demand for the other good it
is used with
Loss leaders One item sold at a loss, encourage sales of additional products in the
range
Controlled pricing If only one supplier they can set high prices
Volume discounting Increase volumes without permanently reducing prices
Solution
Lecture Example 2
Required
Assuming units demanded in Lecture Example 1 to be purely price dependent, what should the selling price be
to ensure maximum demand of 54,500 units?
Solution
3 Formula summary
Formula given in exam
Demand function: P = a – bQ
Where:
P = selling price
Q = quantity demanded at that price
a = theoretical maximum price
change in price
b =
change in quantity
Formula to learn
% change in Q
Price elasticity of demand (PED) =
% change in P
Short-term
decisions
Quantitative analysis
in budgeting
Learning
curves
Significant
Reached when no Applies to other costs Some of the problems with
manual element
further improvements which may also reduce as the theory include:
Repetitive task
can be made the workforce gains How to calculate the
Early stage of
experience rate?
production
The time taken per Materials Is the rate really
Consistent units is constant
workforce Variable overhead constant?
No breaks in Fixed overhead When will production
production reach the steady
Motivated state?
workforce
Risk preferences
Limitations:
Long term average
Ignores risk
May not represent a
possible outcome
Inappropriate for one off
decisions
Solution
Solution
Lecture Example 3
Maximax
Required
Using the information from Lecture Example 1, what decision would be taken using the maximax decision rule?
Solution
Solution
Solution
The group has had similar problems in the past and experience suggests that when stores are upgraded, 60% achieve
good results and 40% poor results.
Because of the doubts, management is considering whether to contract a leading market research company to carry out
consumer research in Ludborough for $1m.
There is 55% probability of positive feedback, and 45% probability of negative feedback. However the survey is not
100% reliable. The probability of a good outcome after positive feedback is 93%, whereas the probability of a poor
outcome after negative feedback is 80%.
If the research indicates a positive attitude, management will consider either deluxe upgrading which will generate more
profit but will cost $12m or standard upgrading costing $6m.
If the research indicates a negative attitude, then management will consider either standard upgrading or shutting down
and selling the site.
Required
Draw up a decision tree and use this to evaluate the decision using expected values.
Determine objectives
Control Planning
Compare actual with budget Set budget
Operate in line
with objectives
Planning
Responsibility
Integration
Motivation
Evaluation
Participation:
Top Down
Bottom Up
Negotiated
Budget set in advance Budget set for several activity Restate budget based on actual
Does not change levels volumes
Good planning tool enabling Useful for control
'what if' scenarios Like for like comparison and
meaningful variances
Yield Variance
Std Qty Actual Qty
Std mix Std mix Difference Std cost Variance
$ $
Material A X X X X X
Material B X X X X X
X X X
Quantity Variance
Std Qty Actual Qty Std
Std mix Std mix Difference margin Variance
$ $
Product A X X X x X
Product B X X X x X
X X X
Performance
management
Profitability Ratios
PBIT
ROCE = 100 %
Capital employed
Net profit
Net profit margin = 100 %
Sales
Gross profit
Gross profit margin = 100 %
Sales
Sales
Asset turnover =
Capital employed
Gearing ratios
long term debt
Gearing ratio =
Long term debt equity (shareholders' funds)
Contribution
Operating gearing =
Profit before interest and tax (PBIT)
ROI RI
Goal congruence
Equitable performance measurement
Retain divisional autonomy
Motivate divisional managers
Optimum resource allocation Approaches
Further performance
management
Chapter 7
Chapters 8 and 9
No Lecture Examples
Chapter 10a
Chapter 10b
Answer to Lecture Example 1
Interpretation of 2 way data table
In 7 outcomes from 16, there will be a loss.
The highest profit could be $44,500, the highest loss, $32,000.
Inflation is not as critical a factor as demand. If demand is low, there will definitely be a loss
whereas losses might arise at any level of inflation.
Joint probability table
Inflation
1.04 1.06 1.08 1.10
Demand p 0.15 0.35 0.35 0.15
30,000 0.2 0.03 0.07 0.07 0.03
31,000 0.3 0.045 0.105 0.105 0.045
32,000 0.3 0.045 0.105 0.105 0.045
33,000 0.2 0.03 0.07 0.07 0.03
There is a 39.5% chance of making a loss, a 60.5% chance of making a profit.
Expected value table
Inflation
1.04 1.06 1.08 1.10
Demand p 0.15 0.35 0.35 0.15
30,000 0.2 –960 –1,610 –980 –150
31,000 0.3 –738 –745 231 517
32,000 0.3 –36 924 1,932 1,260
33,000 0.2 444 1,729 2,422 1,335
Expected value of profit is $5,575.
Decision at D:
(H) Deluxe upgrade $38.6m – $12m = $26.6m
(I) Standard upgrade $23.95m – $6m = $17.95m
Therefore choose Deluxe upgrade
Decision at E:
(J) Standard upgrade $13m – $6m = $7m
Shutdown $15m
Therefore choose to shutdown
Expected value at C (0.55 26.6) + (0.45 15) = $21.38
Decision at A:
No research – deluxe upgrade $20m
Research £21.38m – £1m $20.38m
Therefore it is marginally preferable to conduct research
Formulae to learn
Costing
Overhead Absorption rate
Budgeted overhead
OAR =
Budgeted activity
Target Costing
Target Cost = Selling price – desired profit margin
Cost gap = Target cost – estimated cost
Throughput accounting
Sales material purchases
Return / hour =
Time on key resource
Return / hour
TPAR =
Cost / hour
Fixed costs
Breakeven point =
Weighted average unit contribution
Pricing
% change in Q
Price elasticity of demand (PED) =
% change in P
Quantitative analysis
y = a + bx
Performance measurement
Profitability Ratios
PBIT
ROCE = 100 %
Capital employed
Net profit
Net profit margin = 100 %
Sales
Gross profit
Gross profit margin = 100 %
Sales
Sales
Asset turnover =
Capital employed
Gearing ratios
Long term debt
Gearing ratio =
Long term debt equity (shareholders funds)
Contribution
Operating gearing =
Profit before interest and tax (PBIT)
Learning curve:
Y= aXb
where Y is the cumulative average time/cost per unit taken to produce X units
a is the time/cost taken to produce the first unit
X is the cumulative number of units
log LR
b is the index of learning (calculated as where r is the learning rate)
log 2
LR is the learning rate as a decimal
Demand curve:
P = a – bQ
a = price when Q = 0
change in price
b =
change in quantity
Mr = a – 2bQ